Today we’re going to talk about Millenials.

No, we’re not going to chide them for wearing T-shirts to work or complain that they’re always on their devices.  Today’s post is about a growing trend among millennials – We are addicted to Free.

If you’ll hang with me for a few minutes I’d like to break down the genesis of this trend, how it has impacted your everyday habits (including financial services), and why each of us should always be conscious consumers.

So let’s start with the why…

Like each generation before us, we have been shaped by the events and trends during our formative years.  In the case of Millenials, I would argue that The Great Recession and the rise of technology were the triggers for our focus on financial self-reliance.

As the financial crisis erupted here in America, we watched our parents lose their jobs and their financial security right as they were nearing retirement.  Our response has been to change jobs more frequently, try to create side hustles for extra income, and strive for financial independence as fast as possible all the while “hacking” our way to low cost and free options.

The proliferation of the internet, software, and technology advancement has been like gasoline on this frugality fire as we have grown accustomed to consuming services that are “free” to the consumer – Gmail, Youtube, Instagram, etc.

As large corporations have continued to roll out these, “free,” services we have happily consumed without much regard to how these Fortune 500 companies manage to pay their bills.

After all, we don’t pay anything to watch Youtube, or have those Amazon socks delivered in two hours, or check our Gmail accounts…right?

Well.  Not really…

All of these technological advancements have certainly changed the way that we operate in our daily bubbles, but it hasn’t made all of this convenience free.  It has simply shifted how we pay for things.  In the past, the consumer used a service and paid the bill directly.  Now we all pay for these services, but do so in a far less direct way.

For example, social media companies make money by sending you targeted ads.  Influencers make money by influencing you to buy things.  Advertisers pay for your time and attention on these platforms and in turn sell you products and services.

Now I hear you saying, “I don’t use those links!” But let’s be honest for a minute, if you didn’t, these companies would cease to exist, and individuals would stop clogging my Instagram feed with videos that invariably start with the phrase, “hey guys!”

So let’s just all agree that nothing is in fact “free.”  If you’re willing to make that leap, let’s talk about why this matters to you as investor…

Financial service companies have gotten into the “free” game

If you’ve opened an internet browser or turned on a television in the last 12 months, I guarantee you have seen ads for trading, taxes, etc. that look like this Fidelity goes to zero commission index funds. Did you count how many times the word “zero” was used?  I lost count.

If you aren’t already, you should now be asking yourself, “so, how do they make money selling ‘free’?”

In the case of trading platforms like Scwhab, TD Ameritrade, and Fidelity, the short answer is that we don’t know yet, but whatever method they utilize will likely be far less straight forward to you the end client.  Let’s explore a few examples:

1. By making money on your idle cash: This one is quite easy to explain. When you have cash in an investment account, your custodian invests that money, earns interest and either pays you less than what they make or nothing at all.  This is not a new strategy (this is what banks do), but I would argue it is far less straightforward than paying for trades directly.
2. Through order routing: When you click the button to make a trade, there is a lot that goes on behind the scenes. Rather than take several pages to explain it, just know that your custodian may be compensated for routing your order to certain firms that take the other side of the trade.  If they do this, it is disclosed to you but I’m guessing you won’t actually notice it since very few people read disclosures (myself included).  So if someone else is paying these custodians to take your trades, where do they make it back up?  From you. The mechanics of how it is done is even more complex and murky but if you want to dig deeper because you are a nerd like me, than check out this Investopedia article Here.  The point is that when you’re making trades it is still going to cost you somewhere along the line.
3. By creating new innovations – Robinhood has been one of the most well-known and recent examples of disrupters in the financial services space. They use #1 and #2 above as well as a whole bunch of other interesting “new” ways to make money.  One of their proposed inventions was to offer checking and savings accounts that paid high interest rates but wouldn’t qualify for FDIC insurance (you know, the guarantee that insures your accounts up to $250,000 if the bank defaults?).  Yea, that is a pretty big deal.  It actually got them in some hot water last year with regulators leading them to scuttle the plan.  If you’re interested in reading some of the other ways Robinhood makes money, check out this interesting article.

I’m not saying that there is anything inherently wrong with any of these strategies.  But I do think it is important to understand how companies make money because a company that doesn’t bring in revenue ceases to exist pretty quickly.

Suffice it to say, purchasing channels have rapidly changed in the last decade for consumers like you and me.  What hasn’t is the corporate mandate to maximize profits.

So my ask is simple – stop running towards the “FREE” sign and become a discerning buyer.  You will be better off and so will the reputation for Millenials.